Tag Archives: commercial loans in australia

Australia’s higher interest rates have been a huge draw card for foreign investment throughout the past 5 years of the GFC.

Despite certain media reports that Australia has now achieved the “safe haven” status among global investors (a statement that I don’t personally agree with), it’s the RBA’s sensible interest policy that has ensured that we remain an attractive investment destination for foreign capital starving for low volatility and more importantly, higher yield.

The Central Bank policies of the US and Europe, of flooding the market with cheap credit and forcing interest rate low for an extended period of time, is designed to force investors to take on risk and move their capital out of cash and into higher risk, higher yielding investments.

Despite what you may read and believe about the economic credentials of our country and the Australian dollars new “safe haven” status, the number one reason that global capital has continued to gravitate towards Australian shores, is the higher interest rates on offer in Australia, compared to the rest of the world.

If the RBA didn’t act so prudently over the past 5 years, and instead followed the desperate path of our overseas counterparts by flooding the economy with cheap credit, Australia could have found itself having to pay much higher interest rates to attract foreign capital, as it would have lost its current competitive advantage.

So be careful what you wish for and ask yourself, should our interest rates continue to drop as a means to spurring economic growth, at what point will Australia lose its appeal as an investment destination for foreign capital and what effect could it have on real interest rates, in the future ?

The USA, is the centre of the investment Universe and what happens in the USA dictates the mode and tempo for markets all around the world. So it is impossible for a Global Recovery to occur if it does not include a recovery in Confidence, Growth and Economic Fundamentals in the USA. As far as a resurgence in Finance and Liquidity in Debt markets, the “buck” starts and stops in the USA.

So reading yesterday in Bloomberg news that the pursuit of higher yields by investors is leading to resurgence in demand for Commercial Real Estate Collateralised Debt Obligations (CRE CDO’s) (www.bloom.bg/W3abzb) got me thinking that the markets may have finally bottomed and we could be moving into the next phase of economic cycle – growth lead by confidence and new investment (as opposed to Government funded GDP).

CDOs are packaged pools of debt that are rated and then sold to investors as Bonds. Assuming the borrowers behind the debt continue to repay their debts (i.e. a high majority of the individual loans forming part of the original pool of funds is repaid), investors receive a regular coupon on their investment (see http://tinyurl.com/d7tz6fr for more information re CDO’s)

CDO’s lost their appeal in 2007 when the Sub Prime crises caused many of the CDO’s at the time to be written down, leading to Billions of dollars in losses for investors all around the world.

Of course, a large part of the problem up to 2007 was that Credit Agencies were not adequately assessing and rating the risk associated with these investments. This resulted in an inflated amount of demand for these products, due to their perceived lower risk, high return profile. At its peak in 2006, over $520b worth of CDO’s were written alone and the sector became heavily reliant on this form of funding.

However, since 2007, the market has been defined by a low risk and much more conservative investor. This has led to many investors accepting very little and sometimes zero return on their capital whilst waiting for confidence, in a post GFC world, to rebuild. Of course, during this period, their has been very little interest and investment in CDO’s due to the stigma attached to this form of security.

It has taken a good part of 5 years but recently we are seeing “green shoots” appear in the Global Debt Markets, with more and more investment gravitating towards property secured debt instruments. In fact, many of our Banks have begun refinancing large tranches of their loan books, previously backed by Government Guarantees, with lower cost funding now available on the Global Markets ( http://tinyurl.com/b6l4byt ), a clear sign that demand for this type of product is improving.

Continued demand for Property related Securities should lead to a decrease in the cost of funds for our Lending Institutions. This will encourage Non-Bank Lenders to once again enter and compete in our local market and increase competition for our over dominant four Major Banks. Competition, particularly in the Commercial Property space, has been almost non-existent since the GFC with the Four Major Banks continuing to overcharge customers (in real terms, margins charged by the Major Banks on Commercial Loan are on average, double their pre GFC levels but disguised by the current low interest rates (See http://conkatsiouras.wordpress.com/2012/07/30/beware-of-banks-bearing-gifts/ ) without any major concern of losing market share, due, predominately to the lack of real competition.

Its competition in any market, that ensures continued innovation between competitors and guarantees that borrowers have access to the most competitive forms of funding, at the best price.

Unfortunately, borrowers, investors and SME’s today have only limited options as far as Commercial Finance goes and this, along with the current tight restrictions on Credit, are a major road block to a return in confidence, investment and sustainable growth, by Australian Business owners.

Hopefully the recent improvements and “Green Shoots” in Global Credit Markets will continue and result in resurgence in Competition, Products, Policies and overall conditions for Commercial Borrowers in 2013. I for one am optimistic that this is a positive sign of things to come.

I am asked regularly why has it become so difficult to raise finance and why have things changed so drastically ?

When I established Folio Finance 7 years ago, the economy was flush with cheap money and Banks, Commercial Lenders, Mortgage Trusts and Private lenders in Australia, couldn’t push their funds out the door quick enough. Commercial Finance sector in Australia was going through its own over inflated bubble. This resulted in more money chasing fewer deals, forcing lenders to take on transactions that were high risk with low return. It was an environment where investors and speculators could venture out and secure investments such as Commercial or Residential Property with little and sometimes no equity and the majority of the risk being transferred from the borrowers to the lenders. Of course, we all know this ended with many investors losing their investments in what were meant to be “secured” investment schemes with the worst impacts still being played in Europe and North America (where having a loan approved was as easy as confirming you had a heart beat). Thankfully, things didn’t get as “wild” here in Australia and the finance sector, supported by a 1 in 100 year mining boom, was able to sustain the impact of the GFC and now has to deal with some of the obstacles the GFC has created, mainly around funding , liquidity, sustainable profits and growth.

I think it’s always been difficult for SME’s to raise finance through our Aussie Banks. Reality is, Aussie banks have always been Asset lenders and never really a true supporter of small companies unless you had Real Property Security. Of course, any banker will deny this and will tell you that repayment capacity comes before security every time. This may be true but loans are rarely approved on Cash Flow alone.

Many factors influence the decisions made by banks. One of the major influences recently has been the greater Government scrutiny post the GFC . This , along with many other factors have worked in unison to create the current environment of tight credit and higher costs.

Rather than try explain them all, ill detail a few of the major issues making it more difficult for SME’s to attain Commercial Property Finance via the main stream banks.

After the GFC, APRA (Australian Prudential Regulation Authority), our prudential regulator of all things Bank, placed larger capital requirements on our banks, stricter lending guidelines, and tighter portfolio controls than pre GFC. Specifically APRA requested the banks reduce their exposure to Commercial Property. This has created an environment where banks can “cherry pick” the best deals with the best margins without any real incentive to pursue business that doesn’t fit their criteria, simply because their portfolios are already overweight in this segment. Recently, this has resulted in a large percentage of customers being forced to refinance their existing Commercial Property Loans. With all the banks undertaking the similar “clean up” of their commercial property portfolios, many customers have found that they have no other option than to sell their property.

Our banks fund approximately 30% of their capital requirements through deposits. For the remaining 70%, they rely on the global market for “mortgage backed securities”. Unfortunately, the over exuberant lending in America and Europe has tarnished the whole of the global banking industry and anything attached to mortgage backed lending. This has resulted in less money flowing towards this investment. With fewer investors, a higher premium is demanded to compensate for the higher perceived risk resulting in higher rates being passed to customers.

Less Capital means that the banks have to squeeze more margin out of every dollar they have to invest. Because capital is scarce and the banks have genuine concerns about their ability to raise capital in the future, they now are chasing not only the best deals, but the best deals with the highest margins. The lack of real competition in the market, as well as the fear and publicity around the GFC and “those greedy Americans and Europeans who ruined it for all of us”, has resulted in the perfect storm for our local banks where they are able to raise rates, increase margin, and blame it all on external events supposedly “outside of their control”,

THE LACK OF COMPETITION IN OUR MARKET IS THE REAL ISSUE. Real local competition is what keeps rates low and keeps the banks at toe. It’s what makes the banks think twice about increasing rates above and beyond those increases set by the Reserve Bank and keeps them working with clients, even when we aren’t the “perfect” prospect. There were many Commercial Lenders operating in Australia pre GFC and they were doing a great job at offering a real alternative to the banks. Unfortunately, they too relied on the global market to raise capital and were forced to close during the GFC, creating more reliance on the banks and more demand on their capital which provides the perfect environment for banks to continue to increase their profits, simply by charging a higher price for their products, without having to worry about innovation or improving their service proposition.

These are just some of the major issues influencing the local lending market and influencing the lending decisions of the banks. Thankfully, over the past 12 months, a number of Non Bank Commercial Lenders and Private Lenders, have reemerged to take on the banks and provide a variety of options for customers who wish to continue to grow and continue to invest in their future. As these lending institutions don’t have branches and rely on Brokers as their distribution channel, many of them won’t be known to you.

In the coming posts, we will discuss what some of these new funders have to offer, how their products and service proposition differ from the traditional banks, and some of the key advantages to using these products.

The folio finance blog has been created to provide up to date and relevant information with respect to Commercial Property Finance.

This blog will give you an insight into how investors and other savvy market participants, are using bank, non bank and non traditional avenues of finance, to purchase Commercial Property and improve their financial future.

Many individuals are discouraged from investing in Commercial Property because they:

a) Believe Commercial Property Investment is too complicated,

b) Think Commercial Property Investment is only for sophisticated investors with large sums of money,

c) They simply believe they will not qualify for finance.

Of course, this is simply wrong and I believe the main cause of this false perception is the lack of public information available on this topic.

This blog aims to fill this information void by providing timely and relevant information on current opportunities, threats, trends, and common strategies used by Commercial Property owners to access funding in today’s market.

My goal for this blog is:

To provide you with the most up to date and relevant information available,

That the information will increase the likelihood of attaining finance,

That the information will help professionals in the Commercial Property area, to better understand and stay up to date with the opportunities in the lending markets and hopefully help them and their own clients, better meet their goals,

To provide a forum for professionals and investors alike, to share their thoughts, ideas and experiences with other members of our community,

So if you have an interest in Commercial Property or, you know someone who is interested in this area, please register to receive regular updates and be a part of our community.